If the fair market value (FMV) of the gifted property is less than the donor's adjusted basis, what basis is used to calculate the loss?

When the fair market value (FMV) of gifted property is less than the donor's adjusted basis, the basis used to calculate any loss upon subsequent sale of the property is determined by the lower of the FMV at the time of the gift or the donor's adjusted basis. This rule is important for tax purposes because it helps to ensure that losses are only recognized when the property is sold below its fair market value, which reflects a real economic loss for the recipient.

Using this rule, if the property is sold later for less than its FMV but more than the adjusted basis, the recipient cannot claim a loss equal to the adjusted basis since the loss would not reflect an actual decline in value. Instead, the basis for loss calculations would hinge on the FMV at the time of the gift, as it represents the value that the recipient received and would incur a loss beyond that.

In summary, when the FMV is less than the original basis, the loss is calculated using the lower figure, ensuring that the tax implications fairly represent the value change experienced by the recipient.